What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2022-02-23 compared with 2021-03-04 · 344 added, 297 removed, 323 unchanged (66% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the section titled “Selected Historical Consolidated Financial Data” and our consolidated financial statements and related notes included elsewhere in this annual report.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

This discussion contains forward-looking statements that involve risks and uncertainties.

3 unchanged sentences

This Management’s Discussion and Analysis does not discuss 2019 performance or a comparison of 2020 versus 2019 performance for select areas where we have determined the omitted information is not necessary to understand our current period financial condition, changes in our financial condition, or our results.

The omitted information may be found in our Final Prospectus for our initial public offering, or our IPO, dated as of October 27, 2020 and filed with the Securities and Exchange Commission, or the SEC, pursuant to Rule 424(b)(4) on October 29, 2020.

The omitted information may be found in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the Securities and Exchange Commission, or the SEC, on March 4, 2021.

Root is a technology company revolutionizing personal insurance with a pricing model based upon fairness and a modern customer experience.

We operate a direct-to-consumer model in which we acquire majority of our customers through mobile applications.

We are currently writing auto insurance in 30 states in the US.

Since launch in 2015, our model has delivered rapid growth and continuously improving operating results.

Our DWP grew to $ 616.8 million in 2020 from $ 451.1 million in 2019 and $106.4 million in 2018.

Similarly our DEP grew to $ 605.2 million in 2020 from $352.9 million in 2019 and $61.4 million in 2018.

We experienced declines in our direct loss ratios to 82.0% in 2020, compared to 99.9% in 2019 and 93.6% in 2018 with corresponding declines in our direct accident period loss ratios to 78.0% in 2020 down from 103.7% in 2019 and 112.1% in 2018.

See the section titled “ — Components of Our Results of Operations.”

The Root advantage is derived from our unique ability to segment individual risk based on complex behavioral data and proprietary telematics, a customer experience built for ease of use and a product offering made possible with our full-stack insurance structure all uniquely integrated into a single cloud-based technology platform that captures the entire insurance value chain—from customer acquisition to claims and administration to ongoing customer engagement.

We operate primarily a direct-to-consumer model in which we currently acquire the majority of our customers through mobile applications.

We believe the Root advantage is derived from our unique ability to efficiently and effectively bind auto insurance policies quickly, aided by segmenting individual risk based on complex behavioral data and proprietary telematics, a customer experience built for ease of use and a product offering made possible with our full-stack insurance structure.

These are all uniquely integrated into a single cloud-based technology platform that captures the entire insurance value chain—from customer acquisition to underwriting to claims and administration to ongoing customer engagement.

Our model benefits from portfolio maturity.

As we scale the business rapidly our results are disproportionately weighted towards new customers compared to traditional insurance carriers.

As we build an underlying base of recurring customers, we expect the following financial impact:

• Improve loss ratio.

As we scale the business, our results are disproportionately weighted towards new customers compared to traditional insurance carriers.

As we build an underlying base of recurring customers, we expect the following financial impacts:

• Improved loss ratio.

Renewal premiums, referring to premiums from a customer’s second term and beyond, have lower loss ratios as compared to new premiums in the customer’s first term.

As we grow our business, we anticipate, consistent with industry norms, that a greater proportion of our premiums will be from customer renewals driving down the loss ratio across our portfolio.

• Increase revenue per customer.

Our product expansion provides an opportunity to generate additional premium and fee income per customer without material incremental marketing cost.

• Reduce marketing as a percentage of premium .

As we grow our business, we anticipate, consistent with industry norms, that a greater proportion of our premiums will be from customer renewals and drive down the loss ratio across our portfolio.

• Reduced marketing as a percentage of premium .

Recurring customer premiums have no associated customer acquisition costs and minimal underwriting costs, driving profitability.

As we grow our business, we anticipate, consistent with industry norms, that a greater proportion of our premiums will be from customer renewals without associated marketing costs.

• Improve retention.

• Improved retention.

As a young insurance carrier weighted towards new customers, we naturally have a higher percentage of more frequent shoppers.

As our business tenures and our flywheel spins allowing us to increase our pricing advantage, we will have the opportunity to acquire more long-standing customers and retain those that

might naturally shop frequently.

In addition to our pricing advantage, our expanding relationships with customers through bundling has also demonstrated improvement in retention.

As our business tenures and our flywheel spins, allowing us to increase our pricing advantage, we will have the opportunity to acquire more long-standing customers and retain those that might naturally shop frequently.

In addition to our pricing advantage, we anticipate our expanding relationships with customers through product bundling will demonstrate further improvement in retention.

• Increased revenue per customer.

Our product expansion provides an opportunity to generate additional premium and fee income per customer without material incremental marketing cost.

We use technology to drive efficiency across all functions, including distribution, underwriting, policy administration and claims in particular.

This allows us to operate with a cost to acquire and cost to serve advantage.

We efficiently acquire customers directly through multiple channels, including digital (performance), strategic partnerships, channel media and referrals, and as a result our marketing costs are well below industry averages.

Today, we acquire more than 75% of our customers through our mobile app and mobile website.

We believe this allows us to operate with a cost to acquire and cost to serve advantage.

We continue to develop machine learning loss models, which allows us to respond more quickly to changes in the market, improve pricing segmentation through enhancements to our UBI model and take appropriate rate actions.

We efficiently acquire customers directly through multiple channels, including embedded, digital

(performance), channel media, referrals and agency.

Our marketing costs have historically been well below industry averages, although in any given period, these costs can vary by channel mix, by state, or due to seasonality or due to the competitive environment.

Today, we acquire the vast majority of our customers through our mobile app and mobile website.

We believe that through prudent investment in and diversification of our marketing channels, including a focus on embedded insurance through our exclusive partnership with Carvana, and leveraging proprietary data science and technology to build out independent agent products and relationships, will position us for more sustainable, long-term and profitable growth.

Additionally, we are realizing operating efficiencies as we scale against our fixed expense base.

Our claims management expenses, as represented by our loss adjustment expense, or LAE, are in line with peers within only two years of bringing claims management in-house and will improve as we further embed machine learning into our processes.

Our claims management expenses, as represented by our loss adjustment expenses, or LAE, are in line with peers within only three years of bringing claims management in-house and we expect to improve as we further embed machine learning into our processes.

We also use our proprietary technology to measure long-term benefits to our business.

1 unchanged sentence

A seasoned state is defined as a state where (1) the regulator has approved our data science-driven telematics and pricing models and (2) we have been writing policies in the state for a minimum of one year with a minimum of two pricing filings.

As a rapidly growing full-stack insurance company, we currently employ a “capital light” model, which utilizes a variety of reinsurance structures at elevated levels of reinsurance.

These reinsurance structures deliver three core objectives (1) Top-Line Growth Without a Commensurate Increase in Regulatory Capital Requirements.

(2) Support of Customer Acquisition Costs and (3) Protection from Outsized Losses or Tail Events .

While reinsurance has been core to our strategy since inception, beginning on July 1, 2020, we increased our use of third-party quota share reinsurance with the implementation of our staggered multi-treaty approach to our program.

As a full-stack insurance company, we currently employ a “capital-light” model, which utilizes a variety of reinsurance structures at elevated levels of reinsurance.

These reinsurance structures deliver three core objectives (1) top-line growth without a commensurate increase in regulatory capital requirements, (2) support of customer acquisition costs and (3) protection from outsized losses or tail events .

We expect to maintain an elevated level of third-party quota share reinsurance while rapidly growing our business in order to operate a capital-light business model.

As our business scales, we expect to have the flexibility to reduce our quota share levels to maximize the return to shareholders.

Given the significant impact of reinsurance on our results of operations, we added new direct basis key performance indicators to enhance investor understanding of the results of our business model prior to reinsurance.

We believe our long-term success will be determined by the progression of our direct metrics used to manage and measure operations.

Although we believe these direct metrics help investors understand the results of our business model, these results are not achievable under our regulatory landscape given our top-line growth and resulting capital requirements, which are relieved, in part, by obtaining reinsurance.

The newly disclosed direct basis metrics include direct contribution, ratio of direct contribution to total revenue, ratio of direct contribution to direct earned premium and direct accident period loss ratio.

For additional information, including definitions of these metrics, see “— Key Performance Indicators” and for reconciliation of direct contribution to the nearest GAAP metric, see “— Non-GAAP Financial Measures.”

In August 2021, we commenced a fronting arrangement with an unaffiliated Texas county mutual insurance company, or the fronting carrier.

Pursuant to this arrangement, we route all of our new auto policies and, over time, expect to route certain renewal auto policies, in Texas through the fronting carrier.

In exchange for a commission paid to the fronting carrier, we assume 100% of the related premium and losses on those policies.

Through this fronting arrangement, we have greater rating and underwriting flexibility that we believe will allow us to more accurately segment risk in Texas to improve profitability.

Given the significant impact of reinsurance on our results of operations, we use certain gross basis key performance indicators to manage and measure our business operations and enhance investor understanding of our business model prior to reinsurance.

We believe our long-term success will be apparent through the progression of our gross metrics.

Results of operations on a gross basis alone are not achievable under our regulatory landscape given our top-line growth and resulting capital requirements, which are relieved, in part, by obtaining reinsurance.

The gross metrics include gross written premium, gross earned premium, direct contribution, ratio of direct contribution to gross earned premium, gross loss ratio, gross LAE ratio and gross accident period loss ratio.

For additional information, including definitions of these key metrics, see “— Key Performance Indicators” and for a reconciliation of direct contribution to the most directly comparable generally accepted accounting principles in the United States, or GAAP, metric, see “— Non-GAAP Financial Measures.”

Key Factors and Trends Affecting our Operating Performance

Our financial condition and results of operations have been, and will continue to be, affected by a number of factors, including the following:

Our Ability to Manage Risk

We leverage technology to help manage risk.

For instance, we leverage machine learning to “clean” behavioral data obtained through a customer’s mobile device, and we use advanced statistical methods to model that data into usable behavior scores.

We leverage intelligent chat functions and various forms of machine learning and advanced automation to help power our claims function.

Technology is a key differentiator in managing risk across our key functions.

Our success depends on our ability to adequately and competitively price risk.

Our Ability to Attract New Customers

Our long-term growth will depend, in large part, on our continued ability to attract new customers to our platform.

We intend to continue to drive new customer growth by leveraging our differentiated consumer experience and our telematics-based pricing.

Additionally, our proprietary dataset will continue to scale as we grow, enabling us to enhance our predictive models that will further improve pricing and attract potential new customers.

We will also continue to target attractive potential customer segments through our digital marketing channels and strategic partnerships.

Similarly, we intend to increase our presence in digital and traditional channel media and expand on our recently launched a national advertising campaign to build our brand awareness.

We intend to continue to drive new customer growth by leveraging our differentiated consumer experience, machine learning loss models and our telematics-based pricing.

Additionally, our proprietary dataset will continue to scale as we grow, enabling us to enhance our predictive models to further improve pricing and attract potential new customers.

We will also continue to target attractive potential customer segments through our embedded experience and digital marketing channels.

Our ability to attract new customers will depend on a number of factors, including the pricing of our products, offerings of our competitors, our ability to expand into new markets, and the effectiveness of our marketing efforts.

Our ability to attract and retain customers depends on maintaining and strengthening our brand by providing superior customer experiences and competitive pricing.

In particular, we are challenged by traditional insurers who have more diverse product

offerings and longer established operating histories.

In particular, we are challenged by traditional insurers who have more diverse product offerings and longer established operating histories.

These competitors can mimic certain aspects of our digital platform and offerings, and as they have more types of insurance products, can offer customers the ability to “bundle” multiple coverage types together, which may be attractive to many customers.

7 unchanged sentences

Today, we are currently licensed in 50 states (48 states for personal auto) and the District of Columbia and operate in 32 of those states.

Our continuous state expansion has unlocked a large total addressable market for sustained growth, made our direct targeted marketing more efficient and creates an opportunity to build a national brand, supporting our marketing holistically.

To expand our geographic footprint, in November 2020, we acquired all of the authorized, issued and outstanding shares of Catlin Indemnity Company, subsequently renamed Root Property & Casualty Insurance Company, or Root Property & Casualty, for $ 22.8 million, which included cash, cash equivalents, and accrued investment income of $ 14.4 million and insurance license indefinite-lived intangible assets of $ 8.4 million.

The transaction costs associated with this acquisition were $ 0.5 million and were allocated to the insurance license indefinite-lived intangible assets acquired.

For further information, see Note 2, “Significant Accounting Policies,” in the Notes to Consolidated Financial Statements.

Our continuous state expansion has unlocked a large total addressable market for sustained growth, made our direct targeted marketing more efficient and created an opportunity to build a national brand, supporting our marketing holistically.

Our Ability to Expand Premiums and Fee Income Per Policy Through Cross-Sell

We are in the early stages of cross-selling non-auto products across our customer base.

In 2019, we began offering renters insurance and, in May 2020, we launched our homeowners insurance policy in partnership with Homesite Insurance, or Homesite.

In 2019, we began offering renters insurance and, in May 2020, we launched our homeowners insurance product in partnership with Homesite Insurance, or Homesite.

Cross-sales allow us to generate additional premiums (renters) and fee income (homeowners) without material incremental marketing spend, and ultimately higher revenue per customer.

2 unchanged sentences

The success of our renters insurance offering is also subject to our ability to develop underwriting capabilities to adequately price renters risk.

Our Ability to Manage Risk

We leverage technology to help manage risk.

For instance, we leverage machine learning to “clean” behavioral data obtained through a customer’s mobile device and we use advanced statistical methods to model that data into usable behavior scores.

We leverage intelligent chat functions, and various forms of machine learning and advanced automation help power our claims function.

Technology is a key differentiator in managing risk across our key functions.

Our success depends on our ability to adequately and competitively price risk.

Recent Developments Affecting Comparability

COVID-19 Impact

In December 2019, COVID-19 was first reported in Wuhan, China and in March 2020, the World Health Organization declared a global pandemic.

The ongoing global pandemic has severely impacted businesses worldwide, including within the insurance industry.

We have been impacted by certain individual state bulletins that

outline COVID-19 premium relief efforts, including restrictions on the ability to cancel policies for non-payment, requiring deferral of insurance premium payments for up to 60 days and restrictions on increasing policy premiums.

Our business has also been impacted by COVID-19 by a slowdown in growth, lower loss ratios due to decreased claim frequency and improved retention.

Throughout 2020, COVID-19 has impacted and may further impact the broader economic environment, including negatively impacting unemployment levels, economic growth, the proper functioning of financial and capital markets and interest rates.

As the COVID-19 pandemic continues, there is uncertainty around the severity and duration of the pandemic and the pandemic’s potential change on our business and our financial performance.

In March 2020, the World Health Organization declared COVID-19 a global pandemic.

The pandemic and related measures taken to contain the spread of COVID-19, such as government-mandated business closures,

“shelter in place” orders, or SIPs, and travel and transportation restrictions, have negatively affected the U.S.

and global economies, disrupted global supply chains and led to unemployment.

We, and other businesses within the insurance industry, have been impacted by certain individual state bulletins that were issued in 2020 and outlined COVID-19 premium relief efforts, including restrictions on the ability to cancel policies for non-payment, requirements to defer insurance premium payments for up to 60 days and restrictions on increasing policy premiums.

The COVID-19 pandemic and governmental responses thereto have impacted and may further impact the broader economic environment, including creating or exacerbating supply chain disruptions and inflation and negatively impacting unemployment levels, economic growth, the proper functioning of financial and capital markets and interest rates.

As a result of the SIPs that started to occur toward the end of March 2020, our customers drove less and we had a resulting decline in loss costs during the first quarter of 2020.

Most parts of the country eased COVID-19-related restrictions and began to return to customary levels of business activity during the second quarter of 2021.

We are now seeing miles driven exceed pre-COVID-19 levels.

As a result of the increase in average miles driven, claims frequency has rebounded proportionally.

In addition, the economic instability caused by the COVID-19 pandemic has led to acute inflationary pressures and supply chain disruptions, which have increased the value of used vehicles and replacement parts in 2021.

These cost increases have resulted in greater claims severity while being partially offset by higher salvage and subrogation recoveries on damaged vehicles.

As a result of certain factors related to the COVID-19 global pandemic, we continue to file in multiple states to establish rates that more closely follow the evolving loss cost trends.

The American Rescue Plan Act became law in March 2021 and provided a third round of stimulus payments from the federal government to many American consumers.

The easing of COVID-19 SIPs and these stimulus payments led to an unexpected surge in interest in vehicle and auto insurance purchases.

This elevated interest resulted in a significant increase in customer acquisition and advertising campaigns in digital channels on the part of our competitors, increasing our customer acquisition costs during 2021.

With the recent surge of the Delta and Omicron variants of COVID-19 across the United States and increasing rates of COVID-19 cases and hospitalizations, it is unclear what the impact of the pandemic will be on future operations.

As the COVID-19 pandemic continues, there is ongoing uncertainty around the severity and duration of the pandemic and the pandemic’s potential impact on our business and our financial performance.

See the section titled “Risk Factors” for more details.

Comprehensive Reinsurance

We expect to continue to utilize reinsurance in the future, and our diversified approach to reinsurance allows us to be flexible in response to changes in market conditions or our own business changes, which allows us to strategically fuel growth and technology investment by optimizing the amount of capital required in a “capital-light” model.

Key Performance Indicators

1 unchanged sentence

We believe these non-GAAP and operational measures are useful in evaluating our performance, in addition to our financial results prepared in accordance with GAAP.

See the section titled “— Non-GAAP Financial Measures” for additional information regarding our use of adjusted gross profit/(loss) and direct contribution and their reconciliation to the most comparable GAAP measures.

Years Ended December 31,

10 unchanged sentences

Renters $ 1.2 $ 1.1 $ 0.2

Direct Written Premium $ 616.8 $ 451.1 $ 106.4

Direct Earned Premium $ 605.2 $ 352.9 $ 61.4

Gross written premium (1)

$ 742.6 $ 616.8 $ 451.1

Gross earned premium (1)

$ 719.6 $ 605.2 $ 352.9

Gross profit/(loss) $ (51.9) $ (14.2) $ (83.5)

3 unchanged sentences

Ratio of adjusted gross profit/(loss) to total revenue (1.0) % 6.1 % (18.7) %

6.1 % (18.7) % (0.5) %

Ratio of Adjusted Gross Profit/(Loss) to Direct Earned Premium

3.5 % (15.4) % (0.3) %

Ratio of adjusted gross profit/(loss) to gross earned premium (0.5) % 3.5 % (15.4) %

Ratio of direct contribution to total revenue 2.3 % 5.4 % (19.8) %

Ratio of Direct Contribution to Direct Earned Premium 3.1 % (16.3) % (12.4) %

Direct Loss Ratio 82.0 % 99.9 % 93.6 %

Direct LAE Ratio 10.1 % 12.0 % 16.9 %

Direct Accident Period Loss Ratio 78.0 % 103.7 % 112.1 %

Ratio of direct contribution to gross earned premium 1.1 % 3.1 % (16.3) %

Gross loss ratio 86.0 % 82.0 % 99.9 %

Gross LAE ratio 10.5 % 10.1 % 12.0 %

Gross accident period loss ratio 87.9 % 76.2 % 103.0 %

______________

(1) Includes premiums assumed from the fronting carrier that commenced in August 2021.

Assumed written premium and assumed earned premium for the year ended December 31, 2021 were $16.7 million and $7.3 million, respectively.

Prior to the fronting carrier commencement, we did not assume any premiums.

Policies in Force

2 unchanged sentences

Premiums per Policy

We define premiums per policy as the ratio of direct written premium on policies in force divided by policies in force.

We define premiums per policy as the ratio of gross written premium on policies in force divided by policies in force.

We view premiums per policy as an important metric since the higher the premiums per policy the greater the amount of earned premium we expect from each policy.

As discussed below in gross written premium, this key

performance indicator has been updated to include assumed written premiums beginning during the third quarter of 2021.

There is no impact to any prior periods for this change.

Premiums in Force

We define premiums in force for our auto policies as premiums per policy multiplied by policies in force multiplied by two.

We view premiums in force as an estimate of annualized run rate of direct written premium as of a given period.

We view premiums in force as an estimate of annualized run rate of gross written premium as of a given period.

Since our auto policies are six-month policies, we multiply this figure by two in order to determine an annualized amount of premiums in force.

3 unchanged sentences

We believe that our calculation of premiums in force is useful to investors and analysts because it captures the impact of growth in customers and premiums per policy at the end of each reported period, without adjusting for known or projected policy updates, cancellations and non-renewals.

Direct Written Premium

We define direct written premium, as the total amount of direct premium on policies that were bound during the period.

We view direct written premium as an important metric because it is the metric that most closely correlates with our growth in direct earned premium.

We use direct written premium, which excludes the impact of premiums ceded to reinsurers, to manage our business because we believe that it reflects the business volume and direct economic benefit generated by our customer acquisition activities, which along with our underlying underwriting and claims operations (direct loss ratio and direct LAE) are the key drivers of our future profit opportunities.

Gross Written Premium

We define gross written premium, as the total amount of gross premium on policies that were bound during the period less the prorated impact of policy cancellations.

Gross written premiums includes direct premiums and assumed premiums.

We began assuming premium during the third quarter of 2021 in connection with our entry into an arrangement with a fronting carrier in Texas;

therefore, there is no impact to this key performance indicator for any prior periods.

We view gross written premium as an important metric because it is the metric that most closely correlates with our growth in gross earned premium.

We use gross written premium, which excludes the impact of premiums ceded to reinsurers, to manage our business because we believe that it reflects the business volume and direct economic benefit generated by our customer acquisition activities, which along with our underlying underwriting and claims operations (gross loss ratio and gross LAE) are the key drivers of our future profit opportunities.

Additionally, premiums ceded to reinsurers can change significantly based on the type and mix of reinsurance structures we use, and, as such, we have the optionality to fully retain the premiums from customers acquired in the future.

Direct Earned Premium

We define direct earned premium as the amount of direct premium that was earned during the period.

Premiums are earned over the period in which insurance protection is provided, which is typically 6 months.

We view direct earned premium as an important metric as it allows us to evaluate our growth prior to the impacts of reinsurance.

Gross Earned Premium

We define gross earned premium as the amount of gross premium that was earned during the period.

Premiums are earned over the period in which insurance protection is provided, which is typically six months.

Gross earned premium includes direct premiums and assumed premiums.

We began assuming premium during the third quarter of 2021 in connection with our entry into an arrangement with a fronting carrier in Texas;

therefore, there is no impact to this key performance indicator for any prior periods.

We view gross earned premium as an important metric as it allows us to evaluate our growth prior to the impacts of reinsurance.

It is the primary driver of our consolidated GAAP revenues.

As with direct written premium, we use direct earned premium, which excludes the impact of premiums ceded to reinsurers to manage our business, because we believe that it reflects the business volume and direct economic benefit generated by our customer acquisition activities, which along with our underlying underwriting and claims operations (direct loss ratio and direct LAE) are the key drivers of our future profit opportunities.

As with gross written premium, we use gross earned premium, which excludes the impact of premiums ceded to reinsurers to manage our business, because we believe that it reflects the business volume and direct economic benefit generated by our customer acquisition activities, which along with our underlying underwriting and claims operations (gross loss ratio and gross LAE) are the key drivers of our future profit opportunities.

Gross Profit/(Loss)

We define gross profit/(loss) as total revenue minus net loss, LAE and other insurance (benefit) expense inclusive of depreciation and amortization.

We define gross profit/(loss) as total revenue minus net loss, and LAE expense and other insurance expense (benefit) inclusive of depreciation and amortization.

We view gross profit/(loss) as an important metric because we believe it is informative of the financial performance of our core insurance business.

Gross margin is equal to gross profit/(loss) divided by total revenue.

Gross profit/(loss) margin is equal to gross profit/(loss) divided by revenue.

Adjusted Gross Profit/(Loss)

6 unchanged sentences

We define direct contribution, a non-GAAP financial measure, as adjusted gross profit/(loss) excluding ceded earned premium, ceded loss and LAE, and net ceding commission and other.

Net ceding commission and other is comprised of ceding commission received in connection with reinsurance ceded, partially offset by sliding scale commission adjustments and amortization of excess ceding commission, and other impacts of reinsurance which are included in other insurance (benefit) expense.

After these adjustments, the resulting calculation is inclusive of only those direct variable costs of revenue incurred on the successful acquisition of business, but exclusive of net ceding commission, ceded loss and LAE and other impacts of reinsurance.

Net ceding commission and other is comprised of ceding commission received in connection with reinsurance ceded, partially offset by related sliding scale commission adjustments and amortization of excess ceding commission, and other impacts of reinsurance ceded which are included in other insurance (benefit) expense.

After these adjustments, the resulting calculation is inclusive of only those gross variable costs of revenue incurred on the successful acquisition of business, but exclusive of net ceding commission, ceded loss and LAE and other impacts of reinsurance ceded.

We view direct contribution as an important metric because we believe it measures progress towards the profitability of our total policy portfolio prior to the impact of reinsurance.

1 unchanged sentence

See the section titled “— Non-GAAP Financial Measures” for a reconciliation of total revenue to direct contribution.

Ratio of Adjusted Gross Profit/(Loss) to Direct Earned Premium

The ratio of adjusted gross profit/(loss) to direct earned premium measures the relationship between the underlying business volume and gross economic benefit generated by our underwriting operations, on the one hand, and our underlying profitability trends, on the other.

We rely on this measure, which supplements our gross margin as calculated in accordance with GAAP, because it provides management with insight into our underlying profitability trends with respect to our customer base.

We use direct earned premium as the denominator in calculating this ratio because it reflects business volume free of elective capital efficiency choices related to our reinsurance programs.

Ratio of Adjusted Gross Profit/(Loss) to Gross Earned Premium

The ratio of adjusted gross profit/(loss) to gross earned premium measures the relationship between the underlying business volume and gross economic benefit generated by our underwriting operations, on the one hand, and our underlying profitability trends, on the other.

We rely on this measure, which supplements our gross profit/(loss) ratio as calculated in accordance with GAAP, because it provides management with insight into our underlying profitability trends with respect to our customer base.

We use gross earned premium as the denominator in calculating this ratio because it reflects business volume free of elective capital-light choices related to our reinsurance programs.

As discussed above in gross written premium, this key performance indicator has been updated to include assumed earned premiums in the calculation of ratio of adjusted gross profit/(loss) to gross earned premium during the third quarter of 2021.

There is no impact to any prior periods for this change.

Years Ended December 31,

2 unchanged sentences

adjusted gross profit/(loss) $ (3.3) $ 21.0 $ (54.2)

Total Direct Earned Premium $ 605.2 $ 352.9 $ 61.4

Ratio of Adjusted Gross Profit/(Loss) to Direct Earned Premium

3.5 % (15.4) % (0.3) %

Ratio of Direct Contribution to Direct Earned Premium

The ratio of direct contribution to direct earned premium measures the relationship between the underlying business volume and gross economic benefit generated by our underwriting operations, on the one hand, and our underlying profitability trends, on the other, without contemplating the impacts of reinsurance.

direct earned premium as the denominator in calculating this ratio because it reflects business volume free of elective capital efficiency cession or commission structures choices from our reinsurance programs.

total gross earned premium $ 719.6 $ 605.2 $ 352.9

Ratio of adjusted gross profit/(loss) to gross earned premium (0.5) % 3.5 % (15.4) %

Ratio of Direct Contribution to Gross Earned Premium

The ratio of direct contribution to gross earned premium measures the relationship between the underlying business volume and gross economic benefit generated by our underwriting operations, on the one hand, and our underlying profitability trends, on the other, without contemplating the impacts of reinsurance.

We rely on this measure, which supplements our gross margin as calculated in accordance with GAAP, because it provides

management with insight into our underlying profitability trends with respect to our total policy portfolio.

We use gross earned premium as the denominator in calculating this ratio because it reflects business volume free of elective capital-light cession or commission structures choices from our reinsurance ceded programs.

As discussed above in gross written premium, this key performance indicator has been updated to include assumed earned premiums in the calculation of ratio of direct contribution to gross earned premium during the third quarter of 2021.

There is no impact to any prior periods for this change.

Years Ended December 31,

2 unchanged sentences

direct contribution $ 8.1 $ 18.9 $ (57.4)

Total Direct Earned Premium $ 605.2 $ 352.9 $ 61.4

Ratio of Direct Contribution to Direct Earned Premium 3.1 % (16.3) % (12.4) %

Direct Loss Ratio

We define direct loss ratio expressed as a percentage, as the ratio of direct losses to direct earned premium.

Direct loss ratio excludes LAE.

We view direct loss ratio as an important metric because it allows us to evaluate incurred losses and LAE separately prior to the impact of reinsurance.

Direct LAE Ratio

We define direct LAE ratio expressed as a percentage, as the ratio of direct LAE to direct earned premium.

We view direct LAE ratio as an important metric because it allows us to evaluate incurred losses and LAE separately.

We actively monitor LAE ratio as it has a direct impact on our results regardless of our reinsurance strategy.

Direct Accident Period Loss Ratio

Direct accident period loss ratio, expressed as a percentage, represents all losses and claims expected to arise from insured events that occurred during the applicable period regardless of when they are reported and finally settled divided by direct earned premiums for the same period.

Changes to our loss reserves are the primary driver of the difference between our direct accident period loss ratio and direct loss ratio.

We believe that direct accident period loss ratio is useful in evaluating expected losses prior to the impact of reinsurance.

total gross earned premium $ 719.6 $ 605.2 $ 352.9

Ratio of direct contribution to gross earned premium 1.1 % 3.1 % (16.3) %

Gross Loss Ratio

We define gross loss ratio expressed as a percentage, as the ratio of gross losses to gross earned premium.

Gross loss ratio excludes LAE.

We view gross loss ratio as an important metric because it allows us to evaluate incurred losses and LAE separately prior to the impact of reinsurance.

As discussed above in gross written premium, this key performance indicator has been changed to include assumed losses and assumed earned premiums in the calculation of gross loss ratio beginning during the third quarter of 2021.

There is no impact to any prior periods for this change.

Gross LAE Ratio

We define gross LAE ratio expressed as a percentage, as the ratio of gross LAE to gross earned premium.

We view gross LAE ratio as an important metric because it allows us to evaluate incurred losses and LAE separately.

Currently, we do not cede any of our LAE to our third-party quota share reinsurance treaties;

therefore, we actively monitor LAE ratio as it has a direct impact on our results regardless of our reinsurance strategy.

As discussed above in gross written premium, this key performance indicator has been changed to include assumed LAE and assumed earned premium in the calculation of gross LAE ratio beginning during the third quarter of 2021.

There is no impact to any prior periods from this change.

Gross Accident Period Loss Ratio

Gross accident period loss ratio, expressed as a percentage, represents all losses and claims expected to arise from insured events that occurred during the applicable period regardless of when they are reported and finally settled divided by gross earned premiums for the same period.

Changes to our loss reserves are the primary driver of the difference between our gross accident period loss ratio and gross loss ratio.

We believe that gross accident period loss ratio is useful in evaluating expected losses prior to the impact of reinsurance.

As discussed above in gross written premium, this key performance indicator has been changed to include assumed accident period losses and assumed earned premium in the calculation of gross accident period loss ratio beginning during the third quarter of 2021.

There is no impact to any prior periods from this change.

Components of Our Results of Operations

1 unchanged sentence

We have agency operations that generate commission revenue by selling homeowners insurance policies on behalf of a third-party insurance company.

We distribute website and app policy inquiry leads in geographies where we do not have a presence to third parties in exchange for fee revenue.

We also generate revenue through fee income from our customers paying on installment and from net investment income earned on our investment portfolio.

3 unchanged sentences

Net Investment Income

Net investment income represents interest earned from our fixed maturity and short-term investments and cash and cash equivalents less investment expenses.

Net investment income is directly correlated with the overall size of our investment portfolio and with the market level of interest rates.

Net investment income represents interest earned from our fixed maturity and short-term investments and cash and cash equivalents less investment expenses, unrealized gains from our private equity investments, and impairment of our Low Income Housing Tax Credits, or LIHTC, project investments.

Net investment income is directly correlated with the overall size of our investment portfolio, market level of interest rates, changes in fair value of our private equity investments and utilization of premium tax credits generated by our LIHTC investment.

Net investment income will vary with both the size of our investment portfolio, market returns and the investment strategy.

Fee and Other Income

Net Realized Gains on Investments

Net realized gains on investments represents the net positive difference between the amount received by us on the sale of an investment as compared to the investment’s cost basis.

For those policyholders who pay premiums on an installment basis, we charge a flat fee for each installment related to the additional administrative costs associated with processing more frequent billing.

Other income primarily comprises commissions earned for homeowners policies placed with third-party insurance companies where we have no exposure to the insured risk, recognized on the effective date of the associated policy, and sale of enterprise technology products to provide telematics-based data collection and trip tracking, recognized ratably as the service is performed.

We recognize this fee income in the period in which we process each installment.

Other income primarily comprises revenue earned from distributing website and app policy inquiry leads in geographies where we do not have a presence, recognized when we generate the lead;

commissions earned for homeowners policies placed with a third-party insurance company where we have no exposure to the insured risk, recognized on the effective date of the associated policy;

and sale of enterprise technology products to provide telematics-based data collection and trip tracking, recognized ratably as the service is performed.

Operating Expenses

Our operating expenses consist of loss and loss adjustment expenses, sales and marketing, other insurance (benefit) expense, technology and development, and general and administrative expenses.

Our operating expenses consist of loss and LAEs, sales and marketing, other insurance expense (benefit), technology and development, and general and administrative expenses.

Loss and Loss Adjustment Expenses

Loss and LAE include an amount determined using adjuster determined case-base estimates for reported claims and actuarial determined unpaid claim estimates using past experience and historical emergence patterns for unreported losses and loss adjustment expenses.

These reserves are established to cover the estimated ultimate cost to settle insured losses.

The unpaid claim estimates consider loss trends, mix of business, and other risk factors impacting claims settlement.

The method used to estimate unpaid LAE reserves is based on claims transaction data, including the relative cost of settling the range of claim types from express material damage claims to more complex injury cases.

These reserves are a liability established to cover the estimated ultimate cost to settle insured losses.

The unpaid loss estimates consider loss trends, mix of business, and other risk factors impacting claims settlement.

The method used to estimate unpaid LAE liability is based on claims transaction data, including the relative cost of adjusting and settling a range of claim types from express material damage claims to more complex injury cases.

Loss and LAE is net of amounts ceded to reinsurers.

2 unchanged sentences

Loss and LAE may be paid out over a period of years.

Various other expenses incurred during claims processing are allocated to LAE.

These amounts include claims salaries, health benefits, bonuses, employee retirement plan related expenses and share-based compensation expense, or Personnel Costs;

Various other expenses incurred during claims processing are considered LAE.

These amounts include claims salaries, health benefits, bonuses, employee retirement plan related expenses and employee share-based

compensation expense, or Personnel Costs;

software expense;

2 unchanged sentences

Sales and Marketing

Sales and marketing includes spend related to performance and partnership channels, channel media, advertising, branding, public relations, consumer insights and referral fees.

These expenses also include related Personnel Costs and Overhead.

We incur sales and marketing activities for all product offerings.

Sales and marketing expense includes spend related to performance and embedded channels, channel media, advertising, branding, public relations, consumer insights and referral fees.

These expenses also include related Personnel Costs, Overhead and warrant compensation expense related to our embedded channel.

We incur sales and marketing expenses for all product offerings.

Sales and marketing are expensed as incurred.

We plan to continue investing in marketing to attract and acquire new customers, increase our brand awareness, and expand our Enterprise product offering.

We expect that sales and marketing will increase in absolute dollars in future periods and vary from period-to-period as a percentage of revenue in the near-term.

We plan to continue investing in and diversifying our marketing channels to attract and acquire new customers, increase our brand awareness, and expand our product offerings.

We expect that in the long-term, our sales and marketing will decrease as a percentage of revenue as the proportion of renewals to our total business increases.

Other Insurance (Benefit) Expense

Other insurance (benefit) expense includes underwriting expenses, credit card and policy processing expenses, premium write-offs, insurance license expenses, and Personnel Costs and Overhead related to actuarial and certain data science activities.

Other insurance expense also includes amortization of deferred acquisition costs like premium taxes and report costs related to the successful acquisition of a policy.

Other insurance expense is expensed as incurred, except for costs related to deferred acquisition costs that are capitalized and subsequently amortized over the same period in which the related premiums are earned.

Other Insurance Expense (Benefit)

Other insurance expense (benefit) includes underwriting expenses, credit card and policy processing expenses, premium write-offs, insurance license expenses, and Personnel Costs and Overhead related to actuarial and certain data science activities.

Other insurance expense (benefit) also includes amortization of deferred acquisition costs like premium taxes and report costs related to the successful acquisition of a policy.

Other insurance expense (benefit) is expensed as incurred, except for costs related to deferred acquisition costs that are capitalized and subsequently amortized over the same period in which the related premiums are earned.

These expenses are also recognized net of ceding commissions earned.

Technology and Development

Technology and development consists of software development costs related to our mobile app and homegrown information technology systems;

Technology and development expense consists of software development costs related to our mobile app and homegrown information technology systems;

third-party services related to infrastructure support;

13 unchanged sentences

therefore, we include these expenses below operating expenses.

Interest expense primarily relates to interest incurred on our long term debt;

certain fees that are expensed as incurred;

and the amortization of debt issuance costs, and the issuance of warrants.

In addition, changes in the fair value of warrant liabilities that are associated with our long term debt and changes in the fair value of our former Simple Agreement for Future Equity, or SAFE, are recorded as interest expense.

Interest expense primarily relates to interest incurred on our long-term debt, certain fees that are expensed as incurred and the amortization of debt issuance costs.

In addition, changes in the fair value of warrant liabilities that were associated with our long-term debt are recorded as interest expense.

Loss on Early Extinguishment of Debt

Loss on early extinguishment of debt is not an operating expense;

therefore, we include these expenses below operating expenses.

Loss on early extinguishment of debt primarily relates to the difference between the reacquisition price of the debt and the net carrying amount of the extinguished debt.

Upon extinguishment of debt, the remaining unamortized discount and debt and warrants issuance costs are recognized as expense.

Results of Operations

7 unchanged sentences

Net realized gains on investments 2.4 0.7 % 0.3 0.1 % 2.1 700.0 %

Fee and other income 18.6 5.4 % 9.7 3.3 % $ 8.9 91.8 %

Total revenue 346.8 100.0 % 290.2 100.0 % 56.6 19.5 %

Fee Income 20.9 6.1 % 17.4 5.0 % 3.5 20.1 %

Other income 6.8 2.0 % 1.2 0.3 % 5.6 466.7 %

Total revenues 345.4 100.0 % 346.8 100.0 % (1.4) (0.4) %

Operating expenses:

1 unchanged sentence

Sales and marketing 270.2 78.2 % 139.7 40.3 % 130.5 93.4 %

Other insurance (benefit) expense ( 1.8 ) (0.5) % 52.3 18.0 % (54.1) (103.4) %

Other insurance expense (benefit) 5.0 1.4 % (1.8) (0.5) % 6.8 377.8 %

Technology and development 65.5 19.0 % 52.9 15.3 % 12.6 23.8 %

1 unchanged sentence

Total operating expenses 830.6 240.5 % 632.1 182.3 % 198.5 31.4 %

Operating loss (485.2) (140.5) % (285.3) (82.3) % (199.9) N.M.

Interest expense (20.0) (5.8) % (77.7) (22.4) % 57.7 (74.3) %

Loss before income tax expense (363.0) (104.7) % (282.4) (97.3) % (80.6) 28.5 %

Loss on early extinguishment of debt (15.9) (4.6) % — — % (15.9) 100.0 %

Loss before income tax expense (521.1) (150.9) % (363.0) (104.7) % (158.1) N.M.

Income tax expense — — % — — % — — %

Net loss (363.0) (104.7) % (282.4) (97.3) % (80.6) 28.5 %

Other comprehensive income:

Changes in net unrealized gains on investments 5.0 1.4 % 0.6 0.2 % 4.4 N.M.

Net loss (521.1) (150.9) % (363.0) (104.7) % (158.1) N.M.

Other comprehensive (loss) income:

Changes in net unrealized (losses) gains on investments (5.2) (1.5) % 5.0 1.5 % (10.2) (204.0) %

Comprehensive loss $ (526.3) (152.4) % $ (358.0) (103.2) % $ (168.3) N.M.

2 unchanged sentences

Net Premiums Earned

Net premiums earned increased $47.2 million, or 17.1%, to $ 322.5 million for the year ended December 31, 2020 compared to 2019.

The increase was primarily due to growth in direct earned premium driven by deeper penetration in the markets in which we operate and a greater proportion of seasoned states, partially offset by higher cessions of earned premium as a result of a change in third-party reinsurance structure.

During the years ended December 31, 2020 and 2019, we ceded approximately 46.7% and 22.0% of our direct earned premiums to third-party reinsurers, respectively.

The change in ceding percentage was driven by a new reinsurance treaty that became effective on July 1, 2020 whereby we increased our use of third-party quota share reinsurance with the implementation of a staggered multi-treaty approach.

Under this new quota share reinsurance program, we began ceding approximately 70% of direct earned premiums with a sequence of inception and maturity dates, and with the majority of the ceded premiums covered on a cohort basis for a four year duration.

The following table presents direct written premium, ceded written premium, net written premium, direct earned premium, ceded earned premium and net earned premium for the years ended December 31, 2020 and 2019:

Net premiums earned decreased $12.2 million, or 3.8%, to $310.3 million for the year ended December 31, 2021 compared to 2020.

The decrease was primarily due to greater cessions of gross earned premium as a result of a change in reinsurance structure partially offset by growth in gross earned premium between the periods.

During the years ended December 31, 2021 and 2020, we ceded approximately 56.9% and 46.7% of our gross earned premiums to third-party reinsurers, respectively.

The change in ceding percentage between the periods was driven by our evolving approach to our reinsurance structure, in an effort to produce a capital-light model with reinsurance terms available to us in the market.

The following table presents gross written premium, ceded written premium, net written premium, gross earned premium, ceded earned premium and net earned premium for the years ended December 31, 2021 and 2020:

Years Ended December 31,

1 unchanged sentence

(dollars in millions)

Direct written premium $ 616.8 $ 451.1 $ 165.7 36.7 %

Gross written premium $ 742.6 $ 616.8 $ 125.8 20.4 %

Ceded written premium (397.3) (378.0) (19.3) 5.1 %

Net written premium 345.3 238.8 106.5 44.6 %

Direct earned premium 605.2 352.9 252.3 71.5 %

Gross earned premium 719.6 605.2 114.4 18.9 %

Ceded earned premium (409.3) (282.7) (126.6) 44.8 %

Net earned premium $ 310.3 $ 322.5 $ (12.2) (3.8) %

Direct earned premium growth was primarily due to a 36.7% increase in direct written premium from greater market share in served U.S.

states and expansion of our U.S.

Gross earned premium growth was primarily due to a 20.4% increase in gross written premium from deeper market penetration across our U.S.

state footprint.

Since December 31, 2019, we began writing auto insurance policies in one additional U.S.

We also saw a 3.9% increase in Premium per Policy for automobile insurance primarily resulting from pricing increases in several U.S.

Fee and Other Income

Fee and other income increased $8.9 million, or 91.8%, to $ 18.6 million for the year ended December 31, 2020 compared to 2019.

We also saw a 7.1% increase in premiums per policy for automobile insurance primarily resulting from pricing increases in several states between the periods.

Net Realized Gains on Investments

Net realized gains on investments increased $2.1 million, or 700.0%, to $2.4 million for the year ended December 31, 2021 compared to 2020.

The increase was due to proceeds received from sales of investments in excess of investments’ cost bases.

Fee income increased $3.5 million, or 20.1%, to $20.9 million for the year ended December 31, 2021 compared to 2020.

The increase was primarily due to increased customer volumes and an increase in customers paying in installments.

Other income increased $5.6 million, or 466.7%, to $6.8 million for the year ended December 31, 2021 compared to 2020.

The increase was primarily due to increased fee revenue from distributing web and app policy inquiry leads in geographies where we do not have a presence to third parties.

Operating Expenses

1 unchanged sentence

Loss and LAE increased $29.5 million, or 8.1%, to $392.3 million for the year ended December 31, 2021 compared to 2020.

The increase was primarily due to higher claims volume and reserves related to the growth in policies in force, net of higher cessions of incurred losses as a result of a change in third-party reinsurance structure.

We experienced declines in our direct loss ratios to 82.0% in 2020, compared to 99.9% in 2019 with corresponding declines in our direct accident period loss ratios to 78.0% in 2020 down from 103.7% in 2019.

The decrease in direct loss ratios and direct accident period loss ratios year over year was driven by deployment of improved and additional underwriting and rating criteria in 2020, an increase in the number of seasoned states from three at the end of 2019 to 20 at the end of 2020, as well as a decrease in claims frequency beginning in March 2020 as a result of a reduction in driving attributable to the COVID-19 pandemic.

Our net loss ratios experienced similar declines between the periods primarily driven by the same factors outlined above, partially offset by an increase in loss corridor provisions.

In addition, loss and LAE for the year ended December 31, 2020 includes an increase to held reserves for prior accident periods of $ 20.9 million primarily related to higher than estimated reported losses resulting from frequency and severity in excess of expectations for bodily injury claims as well as higher emergence of collision claims from accident years 2019 and prior, partially due to timing of reported claims.

The year ended December 31, 2020 also included development of incurred losses related to accident years 2019 and prior as a result of a change in estimate.

The adjustments recorded in the year ended December 31, 2020 were necessary in order to effectuate management’s best estimate for determining the estimated ultimate cost of settling claims using our knowledge and experience about past and current events and developments.

The increase was primarily due to higher claims volume, increased claim severity and greater

reserves related to the growth in policies in force, partially offset by higher cessions of incurred losses, net of higher loss corridor reserves due to an increase in our loss ratio, as a result of a change in our reinsurance structure.

Gross accident period loss ratios increased to 87.9% from 76.2% for the years ended December 31, 2021 and 2020, respectively.

The change in the loss ratios was driven by higher loss costs due to elevated claims frequency as miles driven during the period exceeded pre-COVID-19 levels and average severity per claim for material damage increased as replacement parts and higher used car prices outpaced expected inflation.

The increases in loss costs were partially offset by growth in average premium per policy.

In addition, loss and LAE for the year ended December 31, 2021 includes a decrease in incurred losses and LAE attributable to accident periods prior to 2021 of $13.6 million.

This decrease is primarily attributed to lower-than-expected reported losses on bodily injury claims from accident year 2020.

In addition, recoveries from subrogation and salvage from 2020 material damage claims were higher than estimated.

Sales and Marketing

Sales and marketing increased $130.5 million, or 93.4%, to $270.2 million for the year ended December 31, 2021 compared to 2020.

The increase was primarily due to increased investment in digital advertising and partnership marketing channels to support growth and market expansion.

Other Insurance (Benefit) Expense

Other insurance (benefit) expense decreased $54.1 million, or (103.4)%, to $( 1.8 ) million for the year ended December 31, 2020 compared to 2019.

The decrease was primarily due to increased ceding commission contra-expense of $91.6 million related to our increased use of third-party quota share reinsurance compared to $7.2 million of ceding commission contra-expense net of sliding scale commission expense for the year ended December 31, 2019.

Under the external quota share reinsurance agreement effective July 1, 2020, which is on a loss occurring basis, we recognized ceding commissions under the agreement in proportion to the recognition of the direct written premiums during the period, including the remaining unearned premiums on ceded policies at the inception of the agreement.

The ceding commission provides for reimbursement of both direct and other periodic acquisition costs, including certain underwriting and marketing costs, and is presented as a reduction of other insurance expense.

This was partially offset by a $14.6 million increase in bad debt expense primarily related to delayed cancellation of policies for non-payment stemming from compulsory state issued notices in reaction to the COVID-19 pandemic and driven by growth in direct written premiums, $8.8 million increase in premium taxes driven by growth in direct written premiums and a $3.1 million increase in payment processing fee expense driven by the increase in collected premiums between periods, $1.9 million increase in personnel and overhead costs due to headcount growth.

The increase was primarily due to increased investment in performance marketing of $73.9 million and branding and advertising of $35.6 million as we responded to changes in consumer behavior and increased customer acquisition and advertising campaigns in digital channels on the part of our competitors.

Performance marketing spend declined during the second half of 2021 as we navigated the exposure to significant cost increases we experienced earlier in the year and responded to the elevated loss cost environment.

We have focused on diversifying our marketing investments to reach more customers and drive profitable growth in the states in which we operate.

Additionally, marketing spend was lower through much of the year ended December 31, 2020 due to uncertainty surrounding the ongoing COVID-19 pandemic.

We also recognized $8.8 million of warrant compensation expense related to Carvana’s progress toward an integrated automobile insurance solution for Carvana’s car buying platform, or Integrated Platform.

See Note 11, “Shared-Based Compensation,” in the Notes to Consolidated Financial Statements for further details on these warrants.

Other Insurance Expense (Benefit)

Other insurance expense (benefit) increased $6.8 million, or 377.8%, to an expense of $5.0 million for the year ended December 31, 2021 compared to 2020.

The increase was primarily driven by $6.7 million in greater underwriting costs, premium taxes and payment processing fee expense due to growth in the core insurance business and greater premiums collected on an installment basis and $5.5 million in higher Personnel Costs and Overhead due to headcount growth.

This was partially offset by a $2.7 million decrease in bad debt expense primarily related to delayed cancellation of policies for non-payment stemming from compulsory state issued notices in reaction to the COVID-19 pandemic during 2020 and a $2.4 million increase in ceding commission contra-expense net of sliding scale commission expense due to reinsurance structure changes.

Technology and Development

Technology and development increased $12.6 million, or 23.8%, to $65.5 million for the year ended December 31, 2021 compared to 2020.

The increase was primarily driven by a $16.7 million increase in personnel and overhead costs due to headcount growth of engineering and product teams and a $5.8 million increase in share-based compensation expense related to the secondary tender offer completed in the first quarter of 2020.

In addition, we incurred a $6.4 million increase in external software and amortization of internally developed software expense for the year ended December 31, 2020 compared to 2019, as we continued to invest in developing and improving our technology platforms and infrastructure.

The increase was primarily driven by incremental investments of $11.5 million in Personnel and Overhead costs as a result of headcount growth of engineering and product teams.

General and Administrative

General and administrative increased $19.1 million, or 24.3%, to $97.6 million for the year ended December 31, 2021 compared to 2020.

The increase was primarily driven by a $14.2 million increase in legal and other professional costs to support our overall growth and emerging compliance initiatives, including the IPO.

In addition, a $10.3 million increase in share-based compensation expense mainly due to the secondary tender offer completed in the first quarter of 2020 and a $10.3 million increase in personnel costs across finance, legal, and administrative teams as a result of an increase in headcount.

The increase was primarily driven by a $14.6 million increase in Personnel and Overhead costs across finance, legal and administrative teams as a result of an increase in headcount.

In addition, we incurred a $11.1 million increase in professional service expenses to support corporate functions and $1.5 million in higher depreciation and amortization as result of write-offs and more fixed assets in use.

This was partially offset by a decrease in share-based compensation expense of $9.7 million for the year ended December 31, 2021 compared to 2020, primarily related to the completion of a secondary tender offer for common stock in 2020 by an investor.

Non-Operating Expenses

Interest Expense

Interest expense increased $55.4 million, or 248.4%, to $ 77.7 million for the year ended December 31, 2020 compared to 2019.

The increase was primarily due to a $54.7 million fair value adjustment of warrants that were exercised to purchase common stock.

In addition, there was a $8.6 million increase in payment-in-kind, or PIK, interest expense and interest paid, and a $3.3 million increase in amortization of debt discount and debt and warrants issuance costs as a result of a higher average debt balance during 2020 compared to 2019.

This was partially offset by a $11.2 million SAFE instrument fair value adjustment recognized during 2019.

Interest expense decreased $57.7 million, or 74.3%, to $20.0 million for the year ended December 31, 2021 compared to 2020.

The decrease was primarily due to the warrant fair value adjustment of $54.7 million that we recognized during 2020.

In addition, there was a $2.9 million decrease in amortization of discount and debt and warrants issuance costs primarily attributable to debt modifications and lower average debt balance.

Loss on Early Extinguishment of Debt

Loss on early extinguishment of debt increased $15.9 million, or 100.0%, to $15.9 million for the year ended December 31, 2021 compared to 2020.

The increase was driven by $15.9 million of accelerated amortization of unamortized discount and debt and warrant issuance costs from the extinguishment of our Term Loan B.

Other Comprehensive (Loss) Income

Changes in Net Unrealized (Losses) Gains on Investments

Changes in net unrealized (losses) gains on investments decreased $10.2 million, or 204.0%, to a loss of $5.2 million for the year ended December 31, 2021 compared to 2020.

The decrease was primary driven by changes of $8.1 million in net unrealized losses on investments and $2.1 million in net realized gains reclassified to net loss.

Comparison of the Years Ended December 31, 2020 and 2019

5 unchanged sentences

Net investment income 5.4 1.6 % 5.2 1.8 % $ 0.2 3.8 %

Net realized gains on investments 0.3 0.1 % — — % $ 0.3 100.0 %

Fee and other income 18.6 5.3 % 9.7 3.3 % $ 8.9 91.8 %

3 unchanged sentences

Sales and marketing 139.7 40.3 % 109.6 37.8 % 30.1 27.5 %

Other insurance expense 52.3 18.0 % 10.2 23.6 % 42.1 412.7 %

Other insurance (benefit) expense (1.8) (0.5) % 52.3 18.0 % (54.1) (103.4) %

Technology and development 52.9 15.3 % 24.0 8.3 % 28.9 120.4 %

1 unchanged sentence

Total operating expenses 632.1 182.3 % 550.3 189.6 % 81.8 14.9 %

Operating loss (285.3) (82.3) % (260.1) (89.6) % (25.2) N.M.

Interest expense (77.7) (22.4) % (22.3) (7.7) % (55.4) 248.4 %

7 unchanged sentences

- Percentage change not meaningful

The December 31, 2019 and 2018 results of operations discussion can be found in our Final Prospectus for our IPO, dated as of October 27, 2020 and filed with the Securities and Exchange Commission, or the SEC, pursuant to Rule 424(b)(4) on October 29, 2020 .

The December 31, 2020 and 2019 results of operations discussion can be found in Part II, Item 7, “Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2020.

Non-GAAP Financial Measures

The non-GAAP financial measures below have not been calculated in accordance with generally accepted accounting principles in the United States, or GAAP, and should be considered in addition to results prepared in accordance with GAAP and should not be considered as a substitute for, or superior to, GAAP results.

The non-GAAP financial measures below have not been calculated in accordance with GAAP and should be considered in addition to results prepared in accordance with GAAP and should not be considered as a substitute for, or superior to, GAAP results.

In addition, adjusted gross profit/(loss) and direct contribution should not be construed as indicators of our operating performance, liquidity or cash flows generated by operating, investing and financing activities, as there may be significant factors or trends that they fail to address.

3 unchanged sentences

(1) monitor and evaluate the performance of our business operations and financial performance;

(2) facilitate internal comparisons of the historical operating performance of our business operations;

(3) facilitate external comparisons of the results of our overall business to

the historical operating performance of other companies that may have different capital structures and debt levels;

(2) facilitate internal comparisons of the historical operating

performance of our business operations;

(3) facilitate external comparisons of the results of our overall business to the historical operating performance of other companies that may have different capital structures and debt levels;

(4) review and assess the operating performance of our management team;

11 unchanged sentences

Loss and loss adjustment expenses (392.3) (362.8) (321.4)

Other insurance benefit (expense) 1.8 (52.3) (10.2)

Other insurance (expense) benefit (5.0) 1.8 (52.3)

Gross profit/(loss) $ (51.9) $ (14.2) $ (83.5)

2 unchanged sentences

Net realized gains on investments (2.4) (0.3) —

Adjustments from other insurance benefit (expense) (1)

Adjustments from other insurance (expense) benefit (1)

56.0 40.9 34.5

1 unchanged sentence

Ceded earned premium 409.3 282.7 77.6

Ceded loss and LAE (194.8) (73.6) (24.4)

Ceded loss and loss adjustment expenses (302.5) (194.8) (73.6)

Net ceding commission and other (2)

1 unchanged sentence

Direct contribution 8.1 18.9 (57.4)

Direct earned premium $ 605.2 $ 352.9 $ 61.4

Gross earned premium $ 719.6 $ 605.2 $ 352.9

Ratio of adjusted gross profit/(loss) to total revenue

(1.0) % 6.1 % (18.7) %

Ratio of adjusted gross profit/(loss) to direct earned premium

3.5 % (15.4) % (0.3) %

Ratio of adjusted gross profit/(loss) to gross earned premium (0.5) % 3.5 % (15.4) %

Ratio of direct contribution to total revenue 2.3 % 5.4 % (19.8) %

Ratio of direct contribution to direct earned premium 3.1 % (16.3) % (12.4) %

Ratio of direct contribution to gross earned premium 1.1 % 3.1 % (16.3) %

______________

(1) Adjustments from other insurance benefit (expense) includes report costs, personnel costs, allocated overhead, licenses, professional fees and other .

(2) Net ceding commission and other is comprised of ceding commissions received in connection with reinsurance ceded, partially offset by sliding scale commission adjustments and amortization of excess ceding commission, and other impacts of reinsurance .

(1) Adjustments from other insurance expense includes report costs, personnel costs, allocated overhead, licenses, professional fees and other .

Liquidity and Capital Resources

We are organized as a holding company, but our primary operations are conducted by our wholly-owned insurance subsidiary, Root Insurance Company, an Ohio-domiciled insurance company.

Additionally, in November

2020, we acquired Root Property & Casualty, which expands our ability to sell personal auto insurance in 48 states and the District of Columbia.

The payment of dividends by Root Insurance Company and Root Property & Casualty are subject to restrictions set forth in the insurance laws and regulations of the States of Ohio and Delaware, respectively, or the insurance laws.

The insurance laws require domestic insurance companies to notify the supervisory superintendent, commissioner and/or director to seek prior regulatory approval to pay a dividend or distribute cash or other property if the fair market value thereof, together with that of other dividends paid or distributions made within the preceding 12 months, exceeds the greater of 10% of the insurance company’s statutory basis policyholders’ surplus as of the preceding December 31 or the statutory basis net income of the insurance company for the 12-month period ended as of the preceding December 31.

To date, our insurance subsidiaries have not paid any dividends and as of December 31, 2020, it was not permitted to pay any dividends to us without approval of the applicable superintendent, commissioner and/or director.

In addition, the Risk-Based Capital Model Act adopted by the NAIC provides formulas to determine the amount of capital that an insurance company must maintain to ensure that it has an acceptable expectation of not becoming financially impaired.

As Root Insurance Company and Root Property & Casualty continue to grow, the amount of capital we are required to maintain to satisfy our risk-based capital requirements may increase significantly.

To comply with these regulations, we may be required to maintain capital in our insurance subsidiaries that we would otherwise invest in our growth and operations.

At December 31, 2020, Root Insurance Company and Root Property & Casualty maintained risk-based capital levels that are in excess of an amount that would require any corrective actions on our part.

Our insurance subsidiaries’ primary sources of funds are capital contributions from the holding company, premiums earned, fee income revenues, and net investment income.

Funds are primarily used to pay claims and operating expenses and to purchase investments.

Our wholly-owned, Cayman Islands-based reinsurance subsidiary, Root Re, maintains a Class B(iii) insurer license under CIMA.

Since inception, we have financed operations primarily through sales of insurance policies and the net proceeds we have received from our issuance of stock and debt and from sales of investments.

Cash generated from operations is highly dependent on being able to efficiently acquire and maintain customers while pricing our insurance products appropriately.

We are continuously evaluating alternatives for efficiently funding our ongoing operations.

We expect, from time to time, to engage in a variety of financing transactions for such purposes, including the issuance of securities.

Regulatory Considerations

We are organized as a holding company, but our primary operations are conducted by two of our wholly owned insurance subsidiaries, Root Insurance Company, an Ohio-domiciled insurance company, and Root Property & Casualty Insurance Company, a Delaware-domiciled insurance company.

The payment of dividends by our insurance subsidiaries is subject to restrictions set forth in the insurance laws and regulations of the States of Ohio and Delaware, respectively, or the insurance laws.

To date, our insurance subsidiaries have not paid any dividends and as of December 31, 2021, they were not permitted to pay any dividends without approval of the applicable superintendent, commissioner and/or director.

As our insurance subsidiaries continue to grow, the amount of capital we are required to maintain to satisfy our risk-based capital requirements may increase significantly.

To comply with these regulations, we may be required to maintain capital in the insurance subsidiaries that we would otherwise invest in our growth and operations.

At December 31, 2021, our insurance subsidiaries maintained a risk-based capital level that is in excess of an amount that would require any corrective actions on our part.

Our wholly owned, Cayman Islands-based reinsurance subsidiary, Root Reinsurance Company, Ltd., or Root Re, maintains a Class B(iii) insurer license under Cayman Islands Monetary Authority, or CIMA.

At December 31, 2021, Root Re was subject to compliance with certain capital levels and a net earned premium to capital ratio of 15:1, which was maintained as of December 31, 2021.

The capital ratio can fluctuate at Root Re’s election, subject to regulatory approval.

Root Re’s primary sources of funds are capital contributions from the holding company, ceded insurance premiums and net investment income.

Root Re’s primary sources of funds are capital contributions from the holding company, assumed insurance premiums and net investment income.

These funds are primarily used to pay claims and operating expenses and to purchase investments.

Root Re must receive approval from CIMA before it can pay any dividend to the holding company.

Since inception, we have financed operations primarily through sales of insurance policies and the net proceeds we have received from our issuance of common stock, debt, and sales of investments.

As of December 31, 2020, we had $ 1,112.8 million in cash and cash equivalents, of which $1,082.1 million was held at Root, Inc.

and outside of regulated insurance entities, and $ 224.5 million was held in marketable securities.

Our cash and cash equivalents primarily consist of bank deposits and money market funds.

Our marketable securities consist of U.S.

treasury securities, municipal securities, corporate debt securities, residential and commercial mortgage-backed securities, and other debt obligations.

In October 2020, we completed our IPO, which resulted in the issuance and sale of 24.2 million shares of common stock at the IPO price of $27.00.

Financing Arrangements

On January 26, 2022, we closed on a $300.0 million five-year term loan with BlackRock Financial Management, Inc., or BlackRock.

The maturity of this term loan is January 27, 2027.

Interest is payable quarterly and is determined on a floating interest rate calculated on the Secured Overnight Financing Rate, or SOFR, plus 9%.

Concurrently with the term loan, we also issued to the lender warrants to purchase 5,664,193 shares of Class A common stock.

Under certain contingent scenarios, BlackRock may also receive additional warrants to purchase shares of Class A common stock equal to 1.0% of the aggregate number of issued and outstanding shares of our common stock on a fully-diluted basis as of the triggering date.

In November 2021, we repaid the outstanding Term Loan B principal balance of $100.0 million and accrued interest, including paid-in-kind, or PIK interest, and fees of $20.9 million.

As a result, we recognized a $15.9 million loss on early extinguishment.

In October 2021, we consummated the transactions contemplated by the investment agreement with Carvana, or the Investment Agreement, that we entered into on August 11, 2021.

We received $126.5 million of gross proceeds from the issuance of 14.1 million shares of redeemable convertible preferred stock designated as the Series A Convertible Preferred Stock.

We also issued Carvana eight tranches of warrants to purchase shares of our Class A common stock.

In connection with the Investment Agreement, we incurred issuance costs of $19.6 million, $9.0

million of which are contingent upon the success of the Investment Agreement as measured by achievement of certain warrant vesting milestones.

In October 2021, upon maturity of our Term Loan A and expiration of the revolving loan, we repaid the outstanding Term Loan A principal balance of $98.8 million and accrued interest and fees of $0.2 million.

In October 2020, we completed our initial public offering, or IPO, which resulted in the issuance and sale of 24.2 million shares of Class A common stock at the IPO price of $27.00.

Concurrently, we issued and sold 18.5 million shares of our Class A common stock in private placements.

We received net proceeds of $1.1 billion after deducting underwriting discounts and other offering costs.

We believe that our existing cash and cash equivalents, marketable securities, cash flow from operations, along with the net proceeds from our IPO, will be sufficient to support working capital and capital expenditure requirements for at least the next 12 months.

Our future capital requirements will depend on many factors, including our insurance premium growth rate, renewal activity, including the timing and the amount of cash received from customers, the expansion of marketing activities, the timing and extent of spending to support development efforts, the introduction of new and enhanced products, the continuing market adoption of offerings on our platform, and the current uncertainty in the global markets resulting from the worldwide COVID-19 pandemic.

We received total net proceeds of $1.1 billion after deducting underwriting discounts and other offering costs.

As of December 31, 2021, we had $706.0 million in cash and cash equivalents, of which $452.2 million was held outside of regulated insurance entities.

We also had $129.9 million in available-for-sale fixed maturity securities.

Our cash and cash equivalents primarily consist of bank deposits and money market funds.

Our available-for-sale fixed maturity securities consist of U.S.

Treasury securities and agencies, municipal securities, corporate debt securities, residential and commercial mortgage-backed securities, and other debt obligations.

We believe that our existing cash and cash equivalents, available-for-sale fixed maturity securities, cash flow from operations, along with the net proceeds from our issuance of redeemable convertible preferred stock and IPO, will be sufficient to support short-term working capital and capital expenditure requirements for at least the next 12 months.

Our long-term capital requirements depend on many factors, including our insurance premium growth rate, renewal activity, including the timing and the amount of cash received from customers, the performance of our embedded product, the timing and extent of spending to support development efforts, the introduction of new and enhanced products, the continuing market adoption of offerings on our platform, and the ongoing uncertainty in the global markets resulting from the global COVID-19 pandemic.

In the first quarter 2022, in response to inflation and loss cost trends and to further drive efficiency and increased focus on our strategic priorities we instituted an organizational realignment, including an involuntary workforce reduction affecting approximately 330 employees, which represented approximately 20% of our workforce.

In the first quarter of 2022, we have recognized charges of $6.8 million for severance, benefits and related costs as a result of these actions, of which $4.3 million of these charges are expected to result in cash expenditures.

Additionally, we expect to incur real estate exit costs comprising accelerated amortization of certain right of use assets and related leasehold improvements and furniture and fixtures of approximately $2.4 million.

We continue to review the potential impact of the realignment, including additional facility lease exits and employee-related costs, and are unable to estimate any additional restructuring costs or charges at this time.

We expect the annual expense savings related to the organizational realignment to be approximately $30 million annually.

Through prudent deployment of capital we believe we have sufficient resources, and access to additional debt and equity capital, to adequately meet our obligations as they come due.

Currently, our debt covenants require cash and cash equivalents held in entities other than our insurance subsidiaries to be at least $200 million at all times.

This threshold may be reduced to $150 million under two sets of circumstances:

issuing 62,500 insurance policies through our Carvana embedded product and achieving a ratio of direct contribution to gross earned premium of 12%;

or ceasing any customer acquisition spend outside of the Carvana agreement and reducing our monthly cash burn to no greater than $12 million.

The following table summarizes our cash flow data for the periods presented:

3 unchanged sentences

Net cash used in operating activities $ (403.4) $ (287.2) $ (127.2)

Net cash used in investing activities ( 114.1 ) ( 114.0 ) ( 20.6 )

Net cash provided by financing activities 1,098.5 535.5 150.9

Net cash provided by (used in) investing activities 76.9 (114.1) (114.0)

Net cash (used in) provided by financing activities (80.3) 1,098.5 535.5

Comparison of Years Ended December 31, 2021 and 2020

Net cash used in operating activities for the year ended December 31, 2021 was $403.4 million compared to $287.2 million of net cash used in operating activities for the year ended December 31, 2020.

The increase was primarily due to the volume and timing of premium receipts, claims payments and reinsurance activity as well as the non-cash impact of the tender offer, warrant fair value adjustment and bad debt expense.

Net cash used in investing activities for the year ended December 31, 2020 was $ 114.1 million compared to $ 114.0 million of net cash used in investing activities for the year ended December 31, 2019.

Although net cash used in investing activities was flat year-over-year, it resulted from our acquisition of Root Property & Casualty, largely offset by the sale, maturities, calls and pay downs of investments for the year ended December 31, 2020 compared to the year ended December 31, 2019.

The increase in cash used in operating activities was primarily due to a greater net loss incurred during the year ended December 31, 2021 compared to the prior year.

Additionally, our evolving reinsurance strategy and timing of related payments and cash receipts, timing of cash payments and accruals related to accounts payable and other expenses and PIK interest paid.

Net cash provided by investing activities for the year ended December 31, 2021 was $76.9 million, primarily due to proceeds from sales, maturities, calls and pay downs of investments, partially offset by purchases of investments and other debt obligations.

Net cash used in investing activities for the year ended December 31, 2020 was $114.1 million, primarily due to purchases of corporate debt securities, commercial mortgage-backed securities, residential mortgage-backed securities and other debt obligations, partially offset by sales, maturities, calls and pay downs of investments.

Net cash used in financing activities for the year ended December 31, 2021 was $80.3 million, primarily due to the pay down of debt and payment of preferred stock and related warrants issuance costs, partially offset by proceeds from the issuance of preferred stock and related warrants in connection with our partnership with Carvana.

Net cash provided by financing activities for the year ended December 31, 2020 was $1,098.5 million, primarily due to proceeds from the issuance of common stock in connection with our IPO and concurrent private placements.

Net cash provided by financing activities for the year ended December 31, 2019 was $ 535.5 million primarily due to the proceeds from issuing preferred stock, our Term Loan A, Term Loan B and SAFE agreements, which was partially offset by the repayment of long-term debt, and debt and warrants issuance costs.

Comparison of Years Ended December 31, 2020 and 2019

The December 31, 2019 and 2018 net cash discussion can be found in our Final Prospectus for our IPO, dated as of October 27, 2020 and filed with the Securities and Exchange Commission, or the SEC, pursuant to Rule 424(b)(4) on October 29, 2020 .

Contractual Obligations

The following is a summary of material contractual obligations and commitments as of December 31, 2020:

Payments Due by Period

Total Less than 1 year 1-3 Years 3-5 Years After 5 Years

(in millions)

Long-term debt $ 199.5 $ 99.5 $ — $ 100.0 $ —

Interest on long-term debt (1)

68.6 4.9 29.3 34.4 —

Operating leases 21.6 3.9 8.8 5.8 3.1

Purchase commitments 25.6 10.0 15.0 0.6 —

Total $ 315.3 $ 118.3 $ 53.1 $ 140.8 $ 3.1

_______________

(1) We have the option to pay interest in-kind, or PIK, on Term Loan B until October 15, 2021.

Through the year-ended December 31, 2020, we have elected to PIK interest on Term Loan B and we plan to PIK interest for the full PIK Period.

See Note 8, “Long-Term Debt,” in the Notes to the Consolidated Financial Statements.

Financing Arrangements

In February 2020, we amended Term Loan A to add a new financial institution (Goldman Sachs Lending Partners LLC) to the syndicate in the amount of $12.5 million.

Accordingly, $12.4 million of the $24.9 million

escrowed funds was remitted to us and the other $12.5 million was remitted to the two aforementioned existing holders to pay down the pro rata portion of the reallocated Term Loan A.

In September 2020, we amended Term Loan A to add financial institutions (Barclays, Deutsche Bank, Morgan Stanley, Wells Fargo and Citibank) to the syndication, upsize the outstanding facility by $13.5 million, and extend its maturity to October 15, 2021.

We also added a $100 million revolving line of credit with members of the Term Loan A syndication as a part of the amendment.

In order to amend Term Loan A, we also amended Term Loan B as the terms are pari passu.

For further information, see Note 8, “Long-Term Debt,” in the Notes to Consolidated Financial Statements.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, results of operations, liquidity or cash flows.

The December 31, 2020 and 2019 net cash discussion can be found in Part II, Item 7, “Liquidity and Capital Resources” of our Annual Report on Form 10-K.

Material Cash Requirements from Contractual and Other Obligations

As of December 31, 2021, our material cash requirements from known contractual and other obligations consisted of purchase commitments, as discussed in Note 12, “Commitments and Contingencies” and operating leases, as discussed in Note 8, “Leases,” in the Notes to Consolidated Financial Statements.

We believe we have sufficient resources, and access to additional debt and equity capital, to adequately meet our obligations as they come due.

Critical Accounting Policies and Estimates

Our financial statements are prepared in accordance with GAAP.

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires our management to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the period.

We evaluate our significant estimates on an ongoing basis, including, but not limited to, estimates related to reserves for loss and loss adjustment expense, premium write-offs, share-based compensation, and valuation allowance on our deferred tax asset.

We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.

The preparation of the consolidated financial statements in conformity with GAAP requires our management to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the period.

We evaluate our significant estimates on an ongoing basis, including, but not limited to, estimates related to reserves for loss and LAE, premium write-offs, and valuation allowance on our deferred tax assets.

We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the

results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.

Actual results could differ from those estimates.

13 unchanged sentences

Loss reserves represent a liability estimate at a given point in time based on many input variables including historical and statistical information, inflation, contract interpretation, weather catastrophe impacts, regulatory environment, and economic conditions.

While we consider many inputs into the loss reserve valuation process, as well as several actuarial methodologies, there is no single method for determining the exact

ultimate claims liability.

While we consider many inputs into the loss reserve valuation process, as well as several actuarial methodologies, there is no single method for determining the exact ultimate claims liability.

In many cases, we use multiple estimation methods based on the particular facts and circumstances of the claims and liabilities being evaluated, resulting in a range of reasonable estimates for reserves for losses and LAE.

2 unchanged sentences

A few considerations and assumptions in estimating ultimate claim liabilities includes relative case reserve adequacy over time, claims cycle time, claims settlement practices, exposure growth, actuarial projections, current economic conditions, driving patterns observed from telematics, weather catastrophes, and claim litigation.

Our loss reserves can be grouped by claim type, where amounts related to material damage of vehicles and property tend to settle within 6 to 12 months, while claims that involve injuries or personal liability have a much longer time period between the occurrence of a loss and the settlement of the claim.

Our loss reserves can be grouped by claim type, where amounts related to material damage of vehicles and property tend to settle within six to 12 months, while claims that involve injuries or personal liability have a much longer time period between the occurrence of a loss and the settlement of the claim.

In general, the longer the time span between the incidence of a loss and the settlement of the claim, the more the ultimate settlement amount can vary.

5 unchanged sentences

• Many of the actuarial estimation methods assume that the speed of claim payments and claim closures, also known as cycle time, remains relatively consistent over time.

While fluctuations and improvements in cycle time are expected as we grow, these timing changes can be difficult to discern from normal process risk variability in the data.

While fluctuations and improvements in cycle time

are expected as we grow, these timing changes can be difficult to discern from normal process risk variability in the data.

• For actuarial methods that rely on case reserve data, there is an implicit assumption that the adequacy of case reserve estimates stays relatively constant over time.

4 unchanged sentences

As such, prior estimates of claim frequency, claim severity, or loss ratio may not be as predictive of future results when the mix of business changes.

• Broader macro level economics can have a material impact on loss reserve estimates, such as a rapid change in miles driven as was observed with COVID-19;

• Broader macro level economics can have a material impact on loss reserve estimates, such as a rapid change in miles driven as was observed with the COVID-19 pandemic;

unanticipated inflation, regulatory restrictions, and legal developments as they relate to contract and coverage interpretation and enforceability.

14 unchanged sentences

Unearned premium is established to cover the unexpired portion of premiums written.

A premium deficiency, as measured on a direct basis, is recorded when the sum of expected losses, loss adjustment expenses, unamortized acquisition costs and maintenance costs exceed the recorded unearned premium reserve and anticipated investment income.

A premium deficiency, as measured on a gross basis, is recorded when the sum of expected losses, LAE, unamortized acquisition costs and maintenance costs exceed the recorded unearned premium reserve and anticipated investment income.

A premium deficiency reserve is recognized as a reduction of deferred acquisition costs and, if necessary, by accruing an additional liability for the deficiency, with a corresponding charge to operations.

We did not record a premium deficiency reserve in 2020 and 2019, respectively.

We did not record a premium deficiency reserve in 2021 or 2020.

In August 2021, we commenced a fronting arrangement with an unaffiliated Texas county mutual insurance company, or the fronting carrier.

We route all of our new auto policies and, over time, expect to route certain renewal auto policies, in Texas through the fronting carrier whereby we assume 100% of the related premium and losses on those policies.

The fronting arrangement allows us to have greater rating and underwriting flexibility.

Premiums assumed are deferred and earned pro rata over the policy period.

Unearned premium is established to cover the unexpired portion of premiums assumed.

Through this fronting arrangement, we have greater rating and underwriting flexibility that we believe will allow us to more accurately segment risk in Texas to improve profitability.

Premiums receivable represents premiums written but not yet collected.

Generally, premiums are collected prior to providing risk coverage, minimizing our exposure to credit risk.

Due to a variety of factors, including certain state regulations related to COVID-19 relief efforts, certain premiums billed may not be collected, for which we establish an allowance for doubtful accounts based on an analysis of historical collection experience.

Allowance for doubtful accounts was $ 3.5 million and $ 2.0 million as of December 31, 2020 and 2019 on the consolidated balance sheets.

Due to a variety of factors, including certain state regulations related to COVID-19 relief efforts, certain premiums billed may not be collected, for which we establish an allowance for doubtful accounts based primarily on an analysis of historical collection experience, adjusted for current economic conditions.

Allowance for credit losses was $5.4 million and $3.5 million as of December 31, 2021 and 2020, respectively, on the consolidated balance sheets.

A policy is generally considered past due on the first day after its due date and policies greater than 90 days past due are written-off.

We recognized premium write-offs, or bad debt expense, of $ 23.6 million and $ 9.0 million for the periods ended December 31, 2020 and 2019, respectively.

We recognized premium write-offs, or bad debt expense, of $20.9 million, $23.6 million and $9.0 million for the periods ended December 31, 2021, 2020 and 2019 respectively.

We recognize this fee income in the period which we process each installment.

Policy acquisition costs, consisting of premium taxes and certain marketing costs and underwriting expenses, net of ceding commissions, related to the successful acquisition or renewal business, are deferred and amortized over the same period in which the related premiums are earned.

Policy acquisition costs, consisting of premium taxes, certain marketing costs and underwriting expenses, and fronting carrier commissions, net of ceding commissions, related to the successful acquisition of new or renewal business.

They are deferred and amortized over the same period in which the related premiums are earned.

Ceding commissions relating to reinsurance agreements are recorded as a reimbursement for both deferrable and non-deferrable acquisition costs.

The portion of the ceding commission that is equal to the pro rata share of acquisition costs based on quota share percentage is recorded as an offset to the direct deferred acquisition costs.

The portion of the ceding commission that is equal to the pro rata share of acquisition costs based on quota share percentage is recorded as an offset to the gross deferred acquisition costs.

Any portion of the ceding commission that exceeds the acquisition costs of the business ceded is recorded as excess ceding commission, a deferred liability, and amortized over the same period in which the related premiums are earned.

In the ordinary course of business, we cede a portion of our business written to affiliated and unaffiliated reinsurers to limit the maximum net loss potential arising from large risks and catastrophes.

In the ordinary course of business, we cede and retrocede a portion of our business written and assumed, respectively, to reinsurers to limit the maximum net loss potential arising from large risks and catastrophes.

These arrangements, known as treaties, provide for reinsurance coverage on quota-share and excess-of-loss basis.

All reinsurance contracts provide for indemnification against loss or liability relating to insurance risk and have been accounted for as reinsurance.

Although the ceding of reinsurance does not discharge us from our primary liability to the policyholder, the insurance company that assumes the coverage assumes the related liability.

4 unchanged sentences

Ceding commissions received in connection with reinsurance ceded have been accounted for as a reduction of other insurance (benefit) expense in the consolidated statements of operations and comprehensive loss.

Some of our reinsurance agreements provide for adjustment of commissions or amount of coverage based on loss experience referred to as sliding scale commissions and loss corridors, respectively.

We recognize the asset or liability arising from these adjustable features in the period the adjustment, calculated based on experience to-date under the agreement, occurs.

Some of our reinsurance agreements provide for adjustment of commissions or amount of coverage based on loss experience referred to as sliding scale commissions, loss corridors and loss ratio caps, respectively.

We recognize the asset or liability arising from these adjustable features in the period the adjustment occurs, which is calculated based on experience to-date under the agreement.

In the event that all or any of the reinsuring companies might be unable to meet their obligations under existing reinsurance agreements, we would be liable for such defaulted amounts.

2 unchanged sentences

For our reinsurance partners who are not rated, we require adequate levels of collateral or letters of credit to be available to us in the event of downside scenarios.

All reinsurance contracts provide for indemnification against loss or liability relating to insurance risk and have been accounted for as reinsurance.

Share-Based Compensation

We award share-based compensation, including stock options with only a service condition, stock options with service and performance conditions, restricted stock units, or RSUs, and restricted stock, to our officers, directors, employees, and certain advisors through approval from the Compensation Committee of the Board of Directors.

Share-based compensation expense is recognized based on the grant date fair value of the awards.

The fair value of stock options is determined on the grant date using the Black-Scholes Merton, or BSM, option-pricing model.

The BSM option pricing model requires inputs based on certain subjective assumptions, including the expected stock price volatility, the expected term of the options, the risk-free interest rate for a period that approximates the expected term of the option and our expected dividend yield.

The fair value of restricted stock and RSUs granted before our IPO had historically been determined by our board of directors, with input from management, and considering third-party valuations of our common stock.

Because there had been no public market for our common stock, our board of directors had determined its fair value at the time of grant of the pre-IPO option by considering a number of objective and subjective factors, including financing investment rounds, operating and financial performance, the lack of liquidity of share capital and general and industry specific economic outlook, among other factors.

Our board of directors determined the fair value of common stock based on valuations performed using the Option Pricing Method and the Probability Weighted Expected Return Method subject to relevant facts and circumstances.

After our IPO, our common stock is now listed on the Nasdaq and we use these market prices for the fair value of our common shares.

Stock options are exercisable for a period up to ten years from the grant date.

We recognize forfeitures as they occur.

Stock options with only a service condition generally vest over four years — 25% cliff vests after one year and approximately 2% vests each month over three years thereafter.

Stock options with service and performance conditions generally vest ratably over a four-year period assuming achievement of the performance conditions.

The compensation expense associated with non-vested stock options that have performance conditions is dependent on our periodic assessment of the probability of the performance conditions being achieved.

If deemed probable, we recognize compensation expense on a straight-line basis over the requisite service period.

If a performance condition is no longer probable of achievement, any previously recognized compensation expense is reversed and no subsequent compensation expense is recognized until achievement is once again probable, at which point a cumulative catch-up is recognized.

RSUs generally vest over four years - 25% cliff vests after one year and approximately 2% vests each month over three years thereafter.

Certain other RSUs vest over four years - 25% cliff vests after one year and in equal increments quarterly over three years thereafter;

vest over four years in equal quarterly increments;

and fully cliff vest after one year.

We generally recognize share-based compensation expense ratably over the respective vesting period.

Before our IPO, the fair value of common stock underlying the options had historically been determined by our board of directors, with input from management, and considering third-party valuations of our common stock.

After our IPO, our common stock is now listed on the Nasdaq and we use these market prices for the fair value of our common shares.

For additional information refer to Note 11, “Share-Based Compensation,” in the Notes to Consolidated Financial Statements.

To recognize this risk of credit loss, we have established an allowance for credit losses based on the probability of default and the expected loss given default as influenced by factors such as the reinsurer’s credit rating

and average life of our reinsurance recoverables.

Allowance for credit losses was $0.2 million and zero as of December 31, 2021 and 2020, respectively.

New Accounting Pronouncements

1 unchanged sentence

Election Under the Jumpstart Our Business Startups Act of 2012

We currently qualify as an “emerging growth company” under the JOBS Act.

Accordingly, we are provided the option to adopt new or revised accounting guidance either (1) within the same periods as those otherwise applicable to non-emerging growth companies or (2) within the same time periods as private companies.

We have elected to adopt new or revised accounting guidance within the same time period as private companies, unless management determines it is preferable to take advantage of early adoption provisions offered within the applicable guidance.

Our utilization of these transition periods may make it difficult to compare our financial statements to those of non-emerging growth companies and other emerging growth companies that have opted out of the transition periods afforded under the JOBS Act.

Prior to December 31, 2021, we qualified as an “emerging growth company,” or EGC, under the Jumpstart Our Business Startups Act, or JOBS Act.

We previously elected to adopt new or revised accounting guidance within the same time period as private companies as permitted by our status as an EGC.

We became a large accelerated filer on December 31, 2021 and lost our status as an EGC.

Accordingly, we will follow the adoption criteria of public companies for new accounting pronouncements beginning with this Annual Report on Form 10-K.

Prior to this Annual Report, our financial statements did not reflect adoption of certain amended guidance that public companies generally may have been required to adopt, but we were not required to adopt based on our EGC status.

This includes Accounting Standard Update, or ASU, 2016-13, Financial Instruments—Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments.

We adopted this guidance using a modified retrospective approach which resulted in a cumulative-effect adjustment to opening accumulated loss as of January 1, 2021 since ASU 2016-13 may only be adopted as of the beginning of a fiscal year.

This adoption did not have a material impact on our previously filed quarterly information.

For additional information on the impact of this guidance, see Note 2, “Basis of Presentation and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis